How to read the ∆P index value?
Fig.1 Dynamics of our ∆P index marked by critical points (from 1 to 12) of the CMI model. Blue areas are the official duration of the US recessions. Vertical black lines are the CMI model’s recession signals (starting and ending points).
∆P INDEX VALUE
The ∆P index value is a comprehensive measure of economic activity that reflects the performance of all sectors of the US economy simultaneously. It is an essential indicator of the economy’s overall health and is used as a key metric for analyzing business cycles. As an investor in the US, it is important to keep an eye on this index, as changes in ∆P can signal shifts in economic activity trends. By monitoring ∆P, investors can better understand the current state of the economy and make more informed decisions regarding their investments.
What does ∆P value change mean?
The ∆P index value reflects changes in the prices of various goods and services. This index is a reliable indicator of market imperfections, as it reveals how prices change for different groups of products based on their availability and demand.
According to the model, the driving force behind any business cycle is the difference (∆P) between market and “natural” price indices (which are the subject of our calculations). This difference forms the stimulus for economic growth (recession), which allows us to predict this growth before the release of statistical data about it. Since the market price includes all possible market conditions, monitoring a single ∆P indicator allows us to unambiguously assess the situation in the economy.
Table 1. ∆P Index value interpretation
Critical points of ∆P
Impact on the economy or economic trend
(It may be strengthened or softened by Fed monetary policy actions or external factors)
Point’s number, intervals
∆P = 0
Points 1, 3, 5,7,9
∆P < 0
Recession phase of the business cycle
Between points 1-3, 5-7, 9-11
∆P > 0
The economic growth phase of the business cycle
Between points 3-5, 7-9, 12+
+∆P = max
Inflection point (changing of economic growth trend). Economy slowdown just before this point (quarterly GDP may reach even negative numbers but with no recession as ∆P>0) and we can see a sell-off for financial indexes.
Then the economy accelerates just after this point and we can see short-termed rapid growth for the stock market indexes.
After points 4, 8, 12
-1 < ∆P < +5
Economy acceleration with its peak at ∆P → 0 (Boom phase). Stock market indexes may reach their peak before the financial crisis, as support to financial markets from the real economy is maximum.
∆P > 20÷50
|Low economic growth phase (maybe stagflation).|
Stock market indexes are growing. This phase of the cycle corresponds to aggressive incentives from Fed (quantitative easing monetary policy, for example).
from ∆P < -1 to -∆P =max
Recession. Financial crisis
From point 1 to 2, from 5 to point 6, from 9 to 10
What does ∆P index value understanding give to investors?
By understanding the ∆P index, investors literally can gain valuable insights into periods of most economic shocks. This knowledge can help investors make informed decisions about their investments and reduce risks. It may make economic shock periods as most profitable ones.
As historical statistics demonstrate, economic crises are always accompanied by financial crises that can result in asset price declines, such as housing or stock prices. In such cases, borrowers may default on loans, leading to significant losses for financial institutions that hold those loans.
Furthermore, understanding the critical points of the business cycle and their impact on the financial cycle can help investors reduce risks when investing in financial assets. By taking into account the timing of these cycles, investors can make more informed decisions about when to invest and when to avoid certain financial assets.
Read also our article The US financial indices comparison. It is about how the ∆P index value correlates with Financial indexes.